An audit expert has questioned how directors in the Rangers Retail Ltd joint venture could sign off annual accounts given their ongoing dispute over commercial agreements and the recent discovery of undocumented shares.

Rangers Retail note in accounts covering the 2015 year to April 26 - filed seven months late with Companies House – 100 shares in the company were previously allotted “in error”.

The error, which came to light in the 2015 financial year, found the allotted share capital in Rangers Retail is in fact 200 shares, not 100 as previously outlined in statements to Companies House.

The company states: “During the year it was identified that the issued share capital in the company was 200 shares, not the 100 shares stated in the 2014 and prior financial statements.

“100 of these shares were allotted in error.

“The directors of the company, having been alerted to the error, will now take all necessary steps to cancel these shares.”

A senior accountant we asked to look over the Rangers Retail accounts questioned how Rangers Retail directors had been able to approve the latest and previous years' accounts, “given half of the company could be owned by somebody else”.

The accounts, signed off by the directors on August 5 of this year, also include a rarely seen audit qualification called a 'disclaimer of opinion'.

Grant Thornton, who also audit Sports Direct, said the disclaimer of opinion relates to a footnote in the Rangers Retail outlining a potential claim by The Rangers Football Club Ltd (TRFC) which states, “the company has breached the terms of an IP [intellectual property] licence and rights agreement” entered into in January 2015 when TRFC regained a controlling stake in Rangers Retail after repaying a £5 million loan due to SportsDirect.com Retail Ltd which had included a security over all of Rangers' assets bar the stadium.

The note adds TRFC directors believe damages “of up to £1 million” may be payable to TRFC in respect of the breach.

SDI Retail Services Ltd countered in the footnotes in the accounts it “does not agree” with TRFC directors and sees “no credible basis” to suggest the IP agreement has been breached and will “fully defend itself” against any allegations.

Rangers Retail auditors warn they were unable to assess the financial impact of any potential breach of contract claim because the company was unable to take legal advice “due to inherent conflicts of interest” between the company and the appointed directors of TRFC and Sports Direct International Retail Services Ltd.

The auditors state they were also “unable to obtain sufficient appropriate audit evidence concerning both the quantum of any provision which may be required in respect of the purported breaches and the impact on the going concern basis of preparation of these financial statements should damages be awarded and the IP License and Rights Agreement be terminated”.

The auditors add: “Because of the significance of the matter described in the Basis of Disclaimer of Opinion on Financial Statements paragraph, we have been unable to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.

“Accordingly we do not express an opinion on the financial statements.”

Our accountant questioned how a potential commercial contract dispute has also led the auditors to a limitation of scope qualification relating to the company's record and book keeping.

The accountant said: “One of the main issues which stands out in the accounts is the board of directors claims it has a conflict on interest and cannot take legal advice.

“In my view if this has been established, the auditor should disengage from the client.

“In more than 30 years as an accountant I've never seen a disclaimer of opinion signed off because you normally disengage and usually the company goes down, so its a most unusual statement to be included in accounts.

“The auditors go on to state they had a limitation of scope, but if they don't take legal advice and can't estimate the potential value of any claim being made, why have they qualified to say they can't tell if the company has kept proper books and records?

“The books and records have nothing to do with a claim from a third party.

“The company is required to keep adequate books and records and if it doesn't its an offence under the Companies Act.

“I have never seen an auditor stating they couldn't tell if there were adequate books and records because the fact is you have a set of accounts in front of you.”

The accountant added: “Its also raises the question, how could the directors approve the accounts when the board doesn't agree on the nature of the commercial deals?”

The current directors of Rangers Retail Ltd board are Paul Murray (appointed March 9, 2015), director of The Rangers Football Club Ltd; Dave King, chairman of Rangers International Football Club Plc (appointed June 4, 2015); commercial lawyer Justin Barnes - acting for Sports Direct (appointed June 3, 2016); and Nigel Conway, who replaced Mike Ashley on the board on June 13, 2016.

Ashley had joined the board on November 3, 2015.

Former directors David Somers and Alexander Easdale stepped down on March 9, 2015.

Justin Barnes replaced Sports Direct chief executive David Forsey, who was on the board since April 2014.

Barnes, an intellectual property law expert, also signed off the 2015 Rangers Retail accounts on behalf of the directors.

Rangers Retail note a £2.74 million dividend was paid on “preference” non-equity shares in the 2015 year, before the annual general meeting and before the final financial statements.

The company notes it paid a dividend of £217,156 in 2014 financial year.

The same £2.74 million dividend as listed in the 2015 accounts as being a “net cash outflow for returns on investment and servicing of finance”.

The Law Dictionary defines a non-equity share as being a “financial instrument such as a bond or stock which is not part of the other equities held by the company”.

Our accountant said: “The dividend was paid out to non-equity, so it will be paid out to preference shares, but dividends are not illegal - its a private company with sufficient reserves at the end of 2015 after paying the dividend.”

Rangers Retail Ltd's latest annual return, outlining who its current shareholders are, has been listed as “overdue” on the Companies House website since July 13.

However the most recent annual return, filed on July 13 2015 and covering Rangers Retail's 2015 financial year, shows SDI Retail Services Ltd held 49 A shares, and Sportsdirect.com Retail Ltd held 26 B shares and The Rangers Football Club Ltd held 25 B shares.

The Rangers Football Club Ltd (TRFC) secured the 26 B shares held by Sportsdirect.com Retail Ltd in January after repaying the £5 million loan.

Rangers Retail notes Sports Direct owner Mike Ashley was the ultimate controlling party at the 2015 financial year end.

The ultimate controlling party as of the 2015 accounts being signed off on August 5, 2016 is The Rangers Football Club Ltd, “by virtue of their 51 per cent ownership of the company”.

The latest accounts from Rangers Retail show the company generated sales of £4.26 million in 2015, down almost 12 per cent on the £4.83 million reported for the 2014 year.

However pre-tax profits jumped 132 per cent £2.72 million, up from £1.17 million in 2014 as a result of a near £1 million reduction in cost of sales to £3.45 million, down from £4.32 million in 2014.

Administrative expenses were also turned around from a loss of £1.18 million in 2014 to a surplus of £13,900 in 2015.

The company notes a £446,708 gain on lease agreements booked in 2014 has now been booked as a £446,708 loss for 2015.

This relates to an “onerous contract” obliging Rangers Retail Ltd to “purchase stock at a cost higher than its net realisable value for the 2014/15 season”.

A further £553,280 gain booked on a contract in 2014 has also now reversed to show a £423,280 loss in 2015.

However the company also notes a £1.93 million gain listed as “other operating income”, which lifted overall pre-tax profits to £2.72 million.

Profit for the year after tax was £2.17 million, up from £877,662 the prior year, though the company booked an overall loss of £566,472 for the year (2014: £660,506 profit) after paying out the £2.74 million dividend (2014: £660, 506 dividend).

Rangers Retail notes it employs no staff other than the directors, and lists employee wages of £243,735 in the 2015 year, down from £335,425 in 2014.

The company notes, “no director remuneration has been charged in these accounts”.

Earlier in the week Rangers launched a £4 million legal case against a number of former directors as well as Sports Direct owner Mike Ashley, claiming commercial deals were agreed below market value.

The legal action came to light in a Court of Session hearing in which Ashley's legal team successfully petitioned the court to have Rangers disclose documents to them.

However that legal action does not include Rangers Retail.

Rangers Retail directors note in the 2015 accounts: “The directors are aware of the financial difficulties of Rangers Football Club but are satisfied based on the nature of the company's relationship with Rangers F.C that the company will continue to operate as a going concern”.

Rangers, Sports Direct and Grant Thornton were approached for comment on the issues raised by our accountant.